CF D3 Revision

Can you say which of the following accounts is the main difference in the adjustments to determine the free cash flow to the equity holders (FCFE) from the free cash flow to firm (FCFF), when you start your calculations from the net income?

• Interest expense

• Depreciation

• Change in working Capital

• Capital Expenditures

Which performance metric is the most difficult for analysts to estimate accurately for future time period

• Dividends

• Earning before interest, taxes, depreciation and amortizations (EBITDA)

• Net Income

• Free Cash Flow

Which dividends discount model (DDM) would be the most appropriate for valuing companies that have maintained relatively stable dividend growth rates over long periods of time?

• Hyper growth DDM

• Constant growth DDM

• Variable growth DDM

• No growth DDM

An analyst has collected the following data from the pertinent sections of various financial statements of the ABC Corporation ($ amounts in millions):

Net income 193 Dividends paid   80

Taxes paid   40 Depreciation   22  

Net investment in working capital  15 Net investment in fixed asset   20

Interest expense   40 Effective tax rate   25%  

Debt issuance   17 Debt retirement     7

Based on the available financial data, the free cash flow to the firm (FCFF) would be closest to (in millions of $):

• 113

• 123

• 145

• 210

An analyst has collected the following data from the pertinent sections of various financial statements of the XYZ Corporation ($ amounts in millions):

Net income   193 Dividends paid   80

Taxes paid   40 Non-cash expenses   22

Net investment in working capital   15 Net investment in fixed asset   20

Interest expense   40 Effective tax rate   25%  

Debt issuance   17 Debt retirement     7

Based on the available financial data, the free cash flow to the equity holder (FCFE) would be closest to (in millions of $):

• 113

• 190

• 200

• 210

An analyst has calculated the free cash flows to the firm (FCFF) and to the equity holders (FCFE) for the past 5 years in preparation for making FCF forecasts. For the past 5 years FCFE has been much smaller than FCFF. Which of the following is the most likely explanation?

• Large net borrowings to buy back common equity

• Large repayment of debt using free cash flow

• Profit margin increasing more rapidly than sales

• Extensive selling of fixed assets

The market's estimate of enterprise value is based on the market value of a company's outstanding debt and equity securities. Which of the following is most appropriate to use as the basis of an alternate way to estimate the enterprise value of a going concern?

• FCF

• FCFE

• Book Value

• Fair value of net assets

The dividend discount model with a dividend that is growing at a constant rate assumes that (choose the best answer)

• Dividends will grow at a constant rate for three years and then a terminal value must be calculated

• Dividends will grow at a constant rate but payments will be discounted at a higher rate after three years

• The current dividends will be discounted by the cost of equity capital

• The current dividend will be discounted by the cost of equity capital minus the growth rate

An Analyst estimating the value of a publicly traded company based on its projected cash flows should discount those cash flows using

• The firm's weighted average cost of capital based on the market values of its debt and equity securities

• The firm's weighted average cost of capital based on its debt and equity securities' par values.

• The firm's weighted average cost of capital based on its debt and equity securities' book values.

• an appropriate opportunity cost of capital

An early stage growth company that is currently 100% equity financed and pays no dividend has decided to issue debt to raise additional capital. The firm believes the debt issuance will increase the value of the firm by reducing its weighted cost of capital (WACC). Which of the following statements most accurately characterize the rationale for believing an issuance of debt would reduce the company's WACC?

• The yield to maturity on new debt is below the expected return on the company's shares

• Being partially debt funded reduces the risk of the firm's capital structure

• The coupon payments on the new debt issue will be lower than the company's future common stock dividends.

• A company's first debt issue is going to be less expensive debt capital than its later debt issues when the company's business matures.